Liquidity management

UBS considers liquidity as the ability to pay current obligations and provide funds for new initiatives within acceptable cost constraints.

The market stress that began with the dislocation of the US residential mortgage market in the second half of 2007 has continued into 2008, persisting throughout first quarter. This led to a sharp reduction in trading volumes in some previously highly liquid markets. In the secured financing markets, certain assets were subject to lower advance rates and were sometimes not accepted.

Since the onset of these market disruptions, UBS has maintained a comfortable liquidity position. This is due to the firm's broad and highly diversified funding sources, its large quantity of liquid assets and its robust contingency planning processes. Throughout first quarter 2008, UBS continued to adjust its asset and liability positions in order to maintain its financial flexibility and took additional steps to further implement the new funding initiatives it began in 2007. These steps included strengthening UBS's substantial liquidity reserves, which include a large multi-currency portfolio of unencumbered high-quality and short-term assets as well as available and unutilized liquidity facilities at several major central banks. Selective asset reduction programs have allowed UBS to achieve this strengthening of UBS's liquidity reserves even during the most difficult market conditions of recent months. The size of UBS's reserves and the structure of its balance sheet - particularly the size, composition and liquidity of its asset base and the term structure of its funding - is reviewed regularly and adjusted to market conditions.

UBS uses several measures to continuously track its liquidity position and maintain a balanced asset / liability profile over time. These measures include monitoring its contractual and behavioral maturity profiles, projecting its liquidity exposures under various stress scenarios and monitoring its secured funding capacity.

To preserve a well balanced and diversified liability structure, Group Treasury routinely monitors UBS's liquidity and funding status and reports its findings regularly to senior management and the Group Executive Board. This includes an assessment of the firm's "cash capital" position and concentration risks in its main funding portfolios. Cash capital is the difference between UBS's long-term funding and the total of illiquid assets, where "long-term" and "illiquid" both refer to a time horizon of one year.

In response to the market dislocation that emerged in the second half of 2007, UBS has increased both its modeling and monitoring frequency, and the projected severity of the scenarios it uses to monitor and develop effective responses that mitigate potential liquidity exposures in a crisis scenario. The models analyze the impacts of a severe liquidity crisis, in which a firm-specific crisis occurs within a stressed market environment. The underlying assumptions in the analysis encompass the characteristics that have emerged in the present market turmoil, such as continued risk aversion and dislocation in terms of money markets and market liquidity limited to a very narrow range of asset classes. The assumptions incorporated in UBS's current stressed scenario analysis have far exceeded the conditions experienced during the current market crisis.

UBS continues to maintain a well balanced portfolio of liabilities that is broadly diversified by market, product and currency, minimizing its dependency on any single funding source. This, together with its centralized funding management, has enabled UBS to fund its business activities throughout the current and prolonged period of market stress. UBS's domestic retail and global wealth management businesses have continued to be valuable and reliable sources of funding. Funding is also provided through numerous short-, medium- and long-term funding programs in Europe, the US and Asia, that provide specialized investments to its institutional and private clients. UBS's funding profile at the end of first quarter 2008 remained similar to its funding profile at year-end 2007, in terms of diversification with respect to both currency and product type, as illustrated in the graphs below. Over 20% of funding was raised on a secured basis and UBS's unsecured funding base remains well diversified: approximately 18% of UBS's funding is from savings and demand deposits, around 18% from long-term debt, 16% from time deposits, 11% from money market papers, 10% from short-term interbank borrowing and 5% from fiduciary deposits.

UBS has also raised a significant amount of new long-term funding in first quarter 2008 despite the persistent difficult market environment. This has included the CHF 13 billion of proceeds from the mandatory convertible notes issuance and over CHF  5 billion from public senior debt issuance (including CHF 425 million of three-year floating rate notes, EUR 2.5 billion of five-year fixed rate notes and a EUR 450 million increase of outstanding notes due June 2010). Through the first three weeks of April, UBS arranged more than CHF 10.5 billion in additional public long-term senior debt transactions, with a weighted average maturity of 7.5 years. UBS also raised EUR  1  billion on 11 April 2008 from the issuance of perpetual preferred securities, while the rights offering that was approved at the annual general meeting on 23 April 2008, and is expected to be completed in June 2008, will raise approximately an additional CHF  15  billion in capital funding.

UBS is working in cooperation with its global counterparties, official institutions and market regulators, both independently and within collective industry forums, to address the causes of the current market dislocations and restore equilibrium. The new measures introduced by several major central banks during the first quarter 2008 have been very helpful in this regard.